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Bubble trouble=20

Malcolm Balen's history of the South Sea Bubble, A Very English Deceit,
reveals the greed and credulity behind the first great stock-market =
sting=20

Peter Jay
Saturday August 10, 2002
The Guardian=20

A Very English Deceit: The Secret History of the South Sea Bubble and =
the
First Great Financial Scandal
by Malcolm Balen
244pp, Fourth Estate, =A317.99
Few things delight us more than the folly of our fellow men, and =
nothing
illustrates that folly more vividly than the bursting of the great =
financial
bubbles which recur with unrelenting regularity down the ages, most =
famously
the South Sea bubble of 1720 and the IT bubble of today.

Malcolm Balen thus shows good timing in choosing this moment to retell =
the
South Sea bubble story, weaving into it the simultaneous, but rather
different, story of the John Law bubble in Paris of the same year. (Law =
was
a Scottish gambler, early Keynesian economist, fatal dueller and, for a
while, financial ruler of Louis XV's France.) They are Rattling Good =
Yarns;
and Balen spins them with all the mastery of the seasoned news man that =
he
is.

In the RGY category there is much about the South Sea bubble story that =
is
not known by every schoolchild. For a start, the South Sea Company was =
not
just some random Initial Public Offering (IPO)-type promotion for a =
purpose
to be disclosed later, which first flew and then crashed. It was a =
major
national institution instigated, originally in 1711 and then again in =
its
bubble role in 1720, by the government, with approval by parliament and =
the
involvement of heads of government - at first the Tory Robert Harley =
and
later the Whig Robert Walpole.

It systematically bought and bribed the sovereign, the court, the =
ministers
and enough members of the Lords and Commons to assure the support it =
needed.
It was the vehicle and expression of a corruption that permeated =
English
government from top to bottom, dignified and efficient.

It sucked in, and in many cases ruined, most of the country's =
aristocracy -
dukes seem to have been particularly susceptible to its blandishments - =
as
well as its leading intellectual lights including Sir Isaac Newton (who =
sold
out in good time and then, despite his office as Master of the Mint, =
fatally
bought back in at the wrong moment), Jonathan Swift and Alexander Pope.

There is also an elite list of those who got out near the top, notably =
the
king (thanks to a disobedient chancellor), Robert Walpole himself =
(though
only because his prudent banker disobeyed his client's instructions to =
buy),
a City bookseller called Thomas Gay and, most amazingly, the formidable
Sarah, wife of the victor of Blenheim, Ramillies, Oudenarde and =
Malplaquet.

Marlborough may, as she reported, have on his return from his wars
"pleasured her twice in his top boots", but financially she wore the
trousers, built Blenheim - palace and park - and amassed the huge =
family
fortune. As she pertinently observed: "Every mortal that has common =
sense or
that knows anything of figures, sees that 'tis not possible by all the =
arts
and tricks upon earth long to carry =A3400,000,000 of paper credit with
=A315,000,000 of specie. This makes me think that this project must =
burst in a
little while and fall to nothing."

Smart lady! But there were too few like her, and too many whose greed,
credulity and wickedness led the country down the primrose path to =
ruin.

The origin of the scandal lay in the conjunction of two forces: a =
national
debt following Marlborough's wars that terrified successive =
governments,
especially the Tories when they finally wrested power from the Whigs =
under
Queen Anne in 1710; and a common swindler, John Blunt, with uncommon =
gifts
of energy, self-confidence and financial cunning. Ministers' needs and
Blunt's schemes combined over a decade to dream up an astonishing =
succession
of scams and wheezes, including a national lottery, for enriching Blunt =
and
bringing cash into the exchequer at the expense of a naive public and, =
in
the longer term, the taxpayer.

The South Sea bubble was merely the last and grossest of these, whereby =
the
South Sea company was to "buy" - ie, take over from the government - =
the
burden of the national debt, on the basis that it would then convert =
the
debt into shares in the company. To persuade the holders of government =
debt
to exchange their guaranteed stream of income from the Treasury for an
equity stake in an enterprise which had no business and therefore no
profits, and whose only "asset" was the economy's largest liability, =
would
have taxed the skills of many a more recent fraudster.

But Blunt understood human nature and human ignorance, and used the two
great pillars of greed and credulity to launch the first pure example =
of
what has since become the classic form of capitalist fraud: company
promotion. So long as he could persuade his contemporaries that the =
share
price would rise, cash would pour into the company in limitless amounts =
in
exchange for new shares, and the holders of government debt would =
convert
their incomes into worthless paper. The national debt, or much of it, =
was
thus first "equitised" and then, when the smash came, effectively
liquidated.

But before then, piling Pelion upon Ossa of financial improvidence, he =
used
the flood of cash to buy - and to finance other grateful dupes to buy - =
the
company's shares, thus for a while sustaining what he constantly =
reminded
his associates was the essence of the business, namely to keep the =
share
price rising at any cost. Robert Maxwell in his last days would have
recognised an equal, perhaps even a superior, in sheer nerve.

Balen does not offer us any general theory of bubbles, of why they work =
and
why they burst. He is content, like a good reporter, to tell the tale. =
But
one thirsts for a deep diagnosis of the recurrence of this pattern in =
human
affairs despite the fact that, at least after the first time, everyone =
knows
it is madness.

Hope springs eternal; and however rough the last disillusionment, =
sooner
rather than later greed stirs again. Greed breeds credulity in those =
who
want to believe; and credulity invites the cunning of those who would
separate fools from their money. Wiser men, too, are separated from =
their
money, subscribing in battalions to the fallacy that they, =
individually,
will get out before the smash comes.

Meanwhile a form of group mania seizes whole societies, the subject of =
which
can be anything from land to antiques, from stamps to tulips, from =
lottery
prizes to - the purest form - shares. Charles Dickens summed it up: "As =
is
well known to the wise in their generation, traffic in Shares is the =
one
thing to have to do with in this world. Have no antecedents, no =
established
character, no cultivation, no ideas, no manners; have Shares...

"Where does he come from? Shares. Where is he going to? Shares. What =
are his
tastes? Shares. Has he any principles? Shares. What squeezes him into
Parliament? Shares...

"Sufficient answer to all; Shares. O mighty Shares!... 'Relieve us of =
our
money, scatter it for us, buy us and sell us, ruin us, only we beseech =
ye
take rank among the powers of the earth, and fatten on us'!" - Our =
Mutual
Friend, Chapter 10.

=B7 Peter Jay was formerly economics editor of the BBC.